U.S. Senate Investigation Gives New Details On Magnetar

A bipartisan report by the U.S. Senate's Permanent Subcommittee
on Investigations adds new detail on the activities of the hedge
fund Magnetar and its role in helping to create more than $40
billion in mortgage-backed securities, most of which failed
disastrously. ProPublica first wrote about Magnetar in April of
last year and the
story is cited several times in the Senate report.

The
report is the culmination of a two-year Senate investigation
into the origins of the 2008 financial crisis. It largely takes a
case study approach, focusing on mortgage lender Washington
Mutual, its regulator, the Office of Thrift Supervision, two
credit rating agencies (Moody's and Standard & Poor's), and
two investment banks, Goldman Sachs and Deutsche Bank. The
investment bank section focuses on the profitable business of
collateralized debt obligations. Between 2004 and 2008, U.S.
financial institutions issued $1.4 trillion worth of CDO
securities. Deutsche and Goldman were notable in the business for
aggressive bets against CDOs, as was Magnetar.

The Senate report quotes candid emails from a Deutsche Bank
official, Greg Lippmann, discussing Magnetar's strategy. "[T]hey
[Magnetar] want to short the market and are willing to pay the
freight," Lippman wrote to a colleague in late September 2006.

In another email, Lippmann explains how Magnetar was willing to
buy the risky and difficult-to-sell bottom part of collateralized
debt obligations in order to bet against the parts higher up in
the capital structure, describing its strategy as "a bit
devious."

In response to ProPublica's earlier report, Magnetar has said
that it did not have a bearish view of the market nor did it have
a plan to short the housing market. A Magnetar spokesman declined
to comment today on the Senate report.

The report focuses extensively on efforts by Goldman Sachs to
short CDOs in 2007. Included in the Goldman section is an email
from an employee at the bank, Deeb Salem, discussing the
possibility of buying a 201Cbunch of the CDO protection201D from
Magnetar.

In a January 2007 email concerning a CDO called Abacus, Goldman
trader Fabrice Tourre details how much CDO managers generally
earned on Magnetar deals as a benchmark. These fees could range
from $2 million to $3 million, based on Tourre's estimate. Banks
could earn from $5 million to $10 million per transaction.

Goldman responded to the Senate report by posting a statement on
its website pointing to an internal review the firm conducted on
its business practices. "While we disagree with much of the
report, we take seriously the issues explored by the
Subcommittee," the statement said.

The report shows how secretive and compartmentalized the CDO
business became in 2006 and 2007. For example, the report cites a
Goldman document describing how investors in Magnetar's deals had
few ways to figure out that the securities they were buying were
created, in part, by a hedge fund so that it could bet against
them.

The report also examines how investors in CDOs started to
withdraw from the market toward the end of the boom. Rather than
stop the business, the banks found ways to continue it. For
instance, the ultimate buyers for key portions of CDOs became
other CDOs, a practice described in
another ProPublica story.

"Rampant conflicts of interest are the threads that run through
every chapter of this sordid story," said Subcommittee Chairman
Senator Carl Levin.